Lear Capital: Perhaps Most Powerful Reason To Own Gold and Silver

The reasons to own gold and silver today are many and growing. The obvious and perhaps most discussed are skyrocketing debt, a weakening dollar and the rising threat of inflation.

Validating these reasons are rising worldwide demand for both gold and silver. The World Gold Council reports that Gold demand in 2010 reached a 10-year high. Much of the growing demand for both gold and silver is coming from China as their desire to replace the dollar as the world's reserve currency, with the Yuan, is growing more evident.

While gold prices and demand rise steadily, silver has begun to steal a few headlines. Rising 77% in just the last 6 months, growing industrial demand is said to be the main driver. However, history well settles the fact that silver is also a monetary metal. Now, in the case of both Gold and Silver, investor demand could be the real driver of prices to stratospheric levels. Here's why.

Let's first look at gold. Eric Sprott, founder of Sprott Asset Management, LP, recently provided data as to the size of the gold market as it relates to global financial assets. That portion represented by gold is a mere 0.7%. That is 3.5 times what it was in 2002, thus explaining a near corresponding rise in the price of gold.

With even today's largest brokerages recommending gold ownership of 5% to 20% of your portfolio, it's easy to see how gold prices may have a long way to go before you can even breathe the word bubble. To illustrate, let's isolate on China for a moment. As of December 31, 2010, China had a reported 1054 tonnes of gold in reserve. The U.S. has 8133 tonnes.

If China's goal is to oust the dollar as the world's reserve currency, it likely has to have greater gold reserves than the U.S. To accomplish this, China would have to accumulate an amount of physical gold equal to two total years of global production. Maybe more.

The case for silver to rise faster and further may be even more compelling. Jeff Clark of Casey Research recently provided similar data on the size of the silver market. With silver at $35 an ounce, the physical silver used to back all ETFs totalled only $20.7 billion. That's less than one-third the size of the market cap of just McDonald's. It's one-fifth the size of Pepsi and not even 5% the size of Exxon Mobile.

You can see how a minor shift in sentiment by investors, toward gold and silver, could send the price of each to unimaginable heights.

And if there is no shift? It's because the world paid off all its debt, the budget gets balanced, real estate rebounds and the dollar reclaims all of its losses over the last 10 years. Herein lies what may be today's most powerfu reason to own gold and silver.

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